Banks defy CBN order on lending rates

LAGOS — THE Central Bank of Nigeria is worried that the gap between the deposit and lending rates was still wide apart despite earlier directive that banks should lower their rates to reflect the spread between the rates.

Minutes of the last monetary policy committee meeting accessed by Vanguard stated: “ A member observed that the gap between the deposit and lending rates was still wide and asked whether there was a model for determining interest rates in Nigeria. The Chairman MPC, CBN Governor, Sanusi Lamido Sanusi, noted that the banks had failed to submit their risk-based interest rate pricing model arising from the non implementation of the decision taken at the April meeting of the MPC.

“The Deputy Governor, Financial System Stability, Kingsley Moghalu, was said to have informed the meeting that the decision had been implemented but that more pressure needed to be exerted on the banks for full compliance with the directive. Currently, there appeared to be no link between the Monetary Policy Rate and interest rates.”

Disbursement of SME funds

Another member, it was gathered from the minutes requested to know what accounted for the slow pace in the disbursement of SME intervention funds. The Committee was informed that the disbursement had been done and that the Bank had been commended by Mr. President who noted that the intervention had saved jobs in the beneficiary companies. On the power intervention fund, members were informed that the fund was tied to having the right power policy and that the Bank would provide guarantees for PENCOM to release about N400 billion for the power sector.

Funding the power sector from PENCOM funds, it was learnt, would reduce the burden of high interest rates as well as remove the foreign exchange risks arising from funding such projects through foreign loans.

Another member, Vanguard learnt, “expressed concern about the increasing exposure of the CBN balance sheet to risk through the quantitative easing policy and noted that measures should be taken to mitigate such risks.

According to him, there was pressure on interest rates. Increased Government funding of its expenditure through bonds had the potential for crowding out the private sector while there was the prospects of a bubble in FGN bonds.

The member noted: “In view of all these, there was need for the Bank to express its concern in a way that would send out appropriate signals to the market.” In response to a question that the time had come to de-emphasise financial system stability and focus on the inflation threat, the Chairman pointed out that there was no time at which the MPC neglected the control of inflation, but that the inflation risk had not been very high. On credit risk, he emphasised that the dimension of the risk was what mattered. On the concern about inflation, it was noted that interest rates might not rise with an increase in the MPR.

Policy Proposals for Monetary Policy Actions

According to the minutes “On the basis of the reports and discussions, the following proposals for monetary policy actions were presented to the Committee: Scenario 1:

Retention of the MPR at 6.0 per cent: The arguments in favour of this proposal were that maintaining the existing monetary policy stance would sustain market expectations with respect to inflation, interest and exchange rates. This would allow uninterrupted implementation of approved policies and the achievement of their objectives.

On the other hand, allowing the existing policy rate to remain would signal insensitivity to the inflation threat arising from the various liquidity injections anticipated towards the end of the year.
Scenario 2: Raise the MPR by 50 basis points:

The policy decision based on this proposal would signal monetary policy tightening in response to the prospects of heightened inflationary pressures arising from anticipated liquidity injections in the near term. This proposal also took cognizance of the moderating impact of the Debt Management Office and State Governments sourcing of funds from the financial market. The argument against this policy action was its potential of raising MPR-tied lending interest rates.

Scenario 3: Retain the MPR at 6.0 per cent but raise the cash reserve ratio and liquidity ratio by 100 and 500 basis points, respectively.

“This policy decision would signal monetary policy tightening while interest rates that were linked to MPR might not rise. The argument against this proposal was that there would be an upward pressure on some components of cost of funds. The Committee was invited to consider the proposals as presented.

Discussion of the Proposals for Monetary Policy Actions

According to MPC minutes “In considering the proposals for monetary policy decisions, the Chairman invited comments from the members on components of the Consumer Price Index, CPI, that the Committee could reasonably focus attention on. This question arose as a result of the rebasing of the CPI by the National Bureau of Statistics which had effectively showed the declining proportion of food in the index.

A member raised concerns about the proposal to increase the MPR. According to him, an increase in the MPR would cause interest rates to rise, and asked what the impact would be on the naira exchange rate.

He enquired whether the Bank was ready to sacrifice the foreign exchange reserves in defending the exchange rate. Responding, the Chairman informed the members that with the liquidity injections expected towards the end of the year from the Federal Government’s expenditure, the AMCON purchase of non-performing loans and election expenses, the Bank could mop up liquidity through the use of open market operations.

This monetary policy action would reduce liquidity and reduce pressure on the exchange rate, he noted, adding that raising the MPR would also increase the cost of borrowing by the Government.

Voting and Decisions of Meeting

After deliberations, the Committee unanimously voted to:
* raise the Monetary Policy Rate (MPR) from 6 per cent to 6.25 per cent.
*adjust the asymmetric corridor of interest rates at MPR+200 basis points and MPR-300 basis points for the Standing Lending Facility and Standing Deposit Facility, respectively.
* resume the sale of Treasury Bills through the open market operations, OMO.

Any Other Business
The Deputy Governor (Economic Policy) sought the permission of the Chairman for dates of the meetings to be shifted from the first to the third week of the month so that departments providing inputs for the report could have enough time to get reliable and up-to-date data.

Responding, the Chairman directed that meetings should continue to hold in the first week of the month until the end of the year when the calendar for the 2011 meetings would be announced.

The Deputy Governor (Economic Policy) also requested the Chairman’s approval to move the MPC meeting to the new meeting room in order to have enough space for participants.